Firm Raises Issue With Application of Proposed Estate Tax Regs

This letter supplements Comments submitted by me on October 26, 2016, which are filed under Document ID: IRS 2016-022-0001.

The following Executive Summary points #36 and #37 are added:

36. The Comments provide examples in which the minority interest discount is lost (including conversion from a general partnership to an LLC voting membership interest, purchase under minimum value of an interest by an outsider, potentially under the valuation theory of commonly accepted valuation principles and if minimum value and if the put have broader application). The following is an additional example, which emphasizes a point contained in footnote 11 on page 25 of the Comments:

California law, as cited, designates that the death of a member is an act of dissociation. As a result, state law treats that interest as a non-voting interest. Unlike with general partnership law, there is not a right, per se, to have the interest purchased. Rather, assignee status is conferred unless the operating agreement provides for a different result. However, under the Proposed Regulations, the loss of voting rights and the characterization of assignee would be an applicable restriction that could not be considered in the valuation process. State law does not fill in the gap respecting the rights that do exist. Presumably, the interest would be valued as a voting interest. However, the estate would be stuck with an illiquid asset for which it does not have a state law right, per se, to liquidate in order to raise money to pay estate tax. If the regulations value as though voting rights (and membership interest) exist, the estate may make the argue for dissolution rights under California Corporation Code Section 17707.03 rights, which will eliminate the minority interest discount and reduce the lack of marketability discount. That section states:

37. Finally, provision should be included that in the event state law lapsing rights are respected by the successors and entity, that they will be respected for federal transfer tax purposes. Thus, neither an applicable restriction nor disregarded restriction should exist because the state law is respected for its bona fides, notwithstanding lapses in voting rights or liquidation rights as a result of state law. A similar recommendation is included in Executive Summary point #21 and on page 31 of the Comments.

Please, include this supplement with my original comments in Document ID: IRS-2016-0022-0001. My request to speak and Outline have been submitted under separate cover. Thank you for your consideration.

Very truly yours,

These comments, when dispatched by mail are being provided with eight (8) counterparts. They are also being posed on the website comment box. On October 24, 2016, I requested admission to the hearing hereby request to provide an oral statement. I am transmitting an outline with respect to my oral statement by a separate letter, enclosing with these Comments and posted to the website..

These comments are provided by the undersigned to address particular areas for clarification and technical response, disputes the authority of the Internal Revenue Service (IRS) and Department of the Treasury (Treasury) to finalize regulations of the scope published and objects to the application of these regulations to family controlled active trade or business, farms, wineries, rental activities and other forms of commercial endeavor and the assets used by and the affiliated entities of such enterprise (collective referred to as "Family Business Enterprise").

Rather than attaching the many articles on point, I reference the editorial A Call to Congress for Action: Potentially Harmful Impact of 2704 Proposed Regulations on Succession of Family Business and Farms and Why It Must Be Stopped! published by Leimberg Information Services, Inc. Newsletter on September 26, 2016. I was the principal co-author of this bi-partisan editorial. There are twenty-one (21) co-authors, all well known estate and tax attorneys or accountants across the country. Most of the authors are law professors or instructors, authors of major textbooks on federal estate tax and/or chairs of state bar committees on taxation or trust law; and, all are recognized experts nationally or regionally in estate tax. In addition, one co-author, Charles Morris, is the former IRS Territorial Manager for the Estate "and Gift Tax Division of the Western United States.

The following are a few examples that create this confusion to which this over-riding Comment is made re-urging that the IRS clearly state what is intended with respect to the scope and impact of relative to minimum value and the put and republish the Proposed Regulations so that a cleaner, narrower and more understandable set of Proposed Regulations can be considered by the public:

1. The Proposed Regulations provide that in the event a restriction is disregarded (or an applicable restriction exists), the fair market value of the transferred interest is determined under "generally applicable valuation principles" as if the disregarded restriction does not exist in the governing documents, local law, or otherwise. See, Prop. Reg. §§ 25.2704-3(f) and 25.2704-2(e). The term "generally applicable valuation principles" appears nowhere in the Internal Revenue Code and nowhere in the estate tax regulations. It is not a defined term in existing gift tax regulations or in the Proposed Regulations. It is referenced twice in transfer tax regulations, namely: (i) in Reg. § 25.2511-1(e) when the valuation of a retained interest is not susceptible to being valued;² and (ii) for adequate disclosure purposes in Reg. § 301.6501(c)-1(f)(7) Examples # 3 and 4.

Since Reg. § 25.2511-1(e) applies generally accepted valuation principles only when the interest is not subject to valuation one would believe that Treasury and the IRS would want to clarify that the use of that phrase in the Proposed Regulations is not an admission that the consequence of the Proposed Regulations is to render family business interests to be not subject to valuation. Rev. Rul. 77-99, 1977-1 CB. 295 similarly applies the phrase only when the interest is not subject to valuation.

Examples #3 and #4 in Reg. § 301.6501(c)-1(f)(7) include references to the phrase "generally applicable valuation principles while using net asset value as the measure of entity valuation." Example #3 states:

In view of the multiplicity of times in the preamble and Proposed Regulations that reference is made to minimum value and the put the question naturally arises respecting the extent of the impact that Treasury and the IRS seek. In view of the undefined and troubling regulatory reference to generally applicable valuation principles and the reference in the foregoing examples to that phrase applying net asset value (which provides the starting point in the determination of minimum value) Treasury and the IRS need to make absolutely clear -- and in words and examples -- the precise scope and consequences of the put and minimum value.

Moreover, there is no assurance that the phrase "generally applicable valuation principles" will preclude the IRS and Treasury and the appraisers they hire from asserting a deviation or abandonment, in whole or part, from objective principles of valuation under existing regulations pursuant to Code §§ 2031 and/or 2512. This concern is neither academic nor unreal. The IRS and Treasury have advocated in a series of cases for positions contrary to objective principles of valuation, and some Tax Court decisions this deviation from objective principles of valuation has been accepted by the Tax Court -- though reversed on appeal when the taxpayer felt the investment in the appeal was worth its prosecution. For example, in Estate of Elkins v. Comr., 140 T.C. No. 5 (2013) and Estate of Guistina v. Comr., T.C. Memo 2011-141, 140 T.C. 86 (2013), rev'd and rem'd in an unpublished opinion 2014 U.S.T.C. ¶ 60,684 (9th Cir. 2014), T.C. Memo 2016-114 (final valuation conclusion on remand) the Tax Court violated objective principles of valuation while making assumptions regarding the reactions of particular individuals. Each decision was reversed on appeal. Taxpayers and practitioners needs to know the extent to which the Proposed Regulations intend to deviate from objective principles of valuation and what is really intended to the vague reference to "generally applicable valuation principles" when the IRS and Treasury have a more exact standard to reference.

In a key objection by the American Society of Appraisers and consistent with the foregoing, they recite:

Comment: The Proposed Regulations reflect a massive deviation from existing valuation standards under Rev. Rul. 59-60 and the valuation regulations under §§ 20.2031 and 25.2512. At a minimum, the next edition of the regulations should better define terms. Make absolutely clear, for the foregoing and for all reasons expressed in these Comments, the attachment materials and the many objections and Comments that have been filed to these Proposed Regulations on each of the following points:

The Proposed Regulations have their greatest impact on Family Business Enterprise. Thus, legitimate trade or business (which this commentator includes any type of trade or business or activity and the assets to the extent used by such enterprise which would be considered closely-held under IRC § 6166 and the regulations, rulings and law thereunder irrespective of ownership tests or percentage of value of the adjusted gross estate). It is toward this legitimate enterprise and the assets they use that the greatest harm will arise from any change in value from fair market value concepts that have governed both tax law and business deals. Thus, it is vital that final regulations make absolutely clear that minimum value (and its component elements) and the put will have no relevance whatsoever once disregarded restrictions are no longer considered.³

Comment: The Proposed Regulations should better define terms. Make absolutely clear, for the foregoing and for all reasons expressed in this Comment, the attachment materials and the many objections and Comments that have been filed to these Proposed Regulations on each of the five points ((i)-(v)) cited in the above point two.

3. The shareholders of family-controlled corporation may establish restrictions against transfer under which the shares are subject. These restrictions may arise in a variety of commercially reasonable settings, including but not limited to entity options or obligations of purchase, shareholder/partner obligations or options to purchase or rights of first refusal among other approaches. These arrangements may establish the price including one equal to fair market value during life or upon death applicable to the interest subject to the option including applicable premiums and discounts. Such an option agreement appears would not be classified as an applicable restriction, since it is subject to IRC § 2703. Prop. Reg. § 25.2704-2(b)(4)(iii). However, the Preamble to the Proposed Regulations states:

Proposed Regulation § 25,2704-3(b) concludes the treatment of the effect of disregarded restrictions as follows:

Moreover, it makes no sense to disrespect an agreement that uses fair market value at the outset (as violative of minimum value) and then after the fair market value restriction is removed to then sanction fair market value as the basis for appraisal. Family members would then be doing indirectly that which they could not do directly. However, the IRS and Treasury have not undertaken this much effort and expressed disgust for "tactics" only to return to the starting point of fair market value. This may explain why the vague theory (since it is not really a standard) of generally accepted valuation principles is used. Worse, as the American Society of Appraisers notes:

Comments: Clarify the scope of the application of Code § 2703 exception with respect to each of applicable restrictions and disregarded restrictions. The current status is vague and the preamble confuses the connection and distinction. It is evident that an agreement that merely references "fair market value" violates the minimum value standard. That fact alone should alert all to the arbitrary character of the new rules, wholly inconsistent with objective valuation principles. Once "fair market" is lost as an acceptable valuation standard for family members to use and have respected for valuation purposes in agreements in any respect, we are left with vagueness, arbitrary rules for administrative convenience detached from business reality. Unequal taxation arises between family members in contrast to non-family enterprise ownership. Moreover, IRS compliance officers will impose harsh injustice to whatever extent the regulations disregard agreements or restrictions that prevent the entity, or its owners, from keeping the general world or competitors from becoming actual owners while respecting this logical protection for the protection of the business.

California Corp. Code § 1601, for example, allows any shareholder to inspect and obtain copies of the books and records of the corporation.⁴ No rule of reason, law or excuse should ever exist that imposes additional estate tax, or the potential for additional estate tax, to arise from a bona fide agreement that seeks to keep outsiders away from the books and records of competitors. The regulations need to make clear that agreements under Code § 2703 to restrict transfer and liquidation rights under rights of first refusal, option agreements and similar contracts, particularly when using fair market value standards or matching bona fide offers from third parties, will be respected for all valuation purposes. This injustice compounds to the extent that the regulations deviate from objective valuation principles.

Moreover, it defines credulity to believe that IRS appraisers will not assert competitors as potential owners of minority interests once legitimate agreements to preclude objectionable ownership are disregarded or disrespected for any purposes relevant, directly or indirectly, to estate taxation. Given the new valuation theory so strongly criticized by the American Society of Appraisers and this Commentator, it appears that each of the following is intended: (i) apply net asset value as the acceptable method for valuation of entities per point 1 at the outset of these Comments; and, (ii) replace objective valuation standards with personality and assumed negotiations between parties. This will fulfill efforts by the IRS and Treasury to undermine objective valuation standards, since the IRS has advocated for that in other prior cases. For example, the Tax Court opinion in Estate of Simplot v. Comr., 112 T.C. 130 (1999), rev'd 249 F.3d 1191 (9th Cir. 2001), states in relevant part:

Comment: Thus, better define terms and avoid inconsistencies, generally, and with respect to options, rights of first refusal, and other agreements that are subject to Code § 2703. The regulations should not sanction, directly or indirectly, any deviation from objective standards of valuation in the determination of the value of gifts or the gross estate. Unless the regulations provide clear and unequivocal protection that agreements within family controlled business that restrict transfer, voting and liquidation rights will be honored for purposes of Code § 2704 and that the § 2704 rules shall not be applied or construed to deviate from objective valuation standards under Code §§ 2031 and 2512, and the regulations thereunder, then Treasury and the IRS should exclude Family Business Enterprise from the revised regulations under § 2704.

4. Rights of first refusal lower value in the real world and under traditional valuation principles. See, Heck v. Comr., supra. The deductions arising from such rights should be respected for federal estate tax purposes. The Heck decision is particularly evocative of the injustice of the Proposed Regulations insofar as they apply to Family Business Enterprise for several reasons.

The Korbel brothers began the business in 1860 and started growing grapes a decade later; they produced their first bottle of champagne in 1882. The business was incorporated in 1903. In 1954 the Heck family purchased control of Korbel, and in 1976 Adolf Heck, Richie Heck's husband, became the sole shareholder of 1,900 shares of common stock outstanding. In 1986 Korbel elected to become an S corporation. In 1994 sales of champagne were 70 percent of its total sales; in 1995, 95 percent of the gross profits were attributable to champagne sales. The estate arises from the death of Richie Heck. Korbel and Brown-Forman (BF) had a distribution agreement effective through 2003. The agreement granted BF the U.S. distribution rights for Korbel's champagne and brandy products. Korbel retained the right to sell its products through its on-premises wine shop. The agreement also provided BF a right of first refusal on the sale of Heck family Korbel stock.⁵ The Tax Court then agreed with the taxpayer's appraiser, Mukesh Bajaj, Ph.D (Dr. Bajaj (Dr. Bajaj).

Dr. Bajaj most commonly testifies in estate and gift tax cases for the IRS. He applied an additional 10-percent discount for Brown-Forman's right of first refusal and limitations on control of the dividend policy. The appraisers for both the IRS and taxpayer agreed that the right of first refusal would reduce value, but disagreed both as to rationale and quantum.

The Heck family and the succession of Korbel winery were also the source of major non-tax litigation that dragged through the Superior Court of California, County of Sonoma for several years. As reported in S.F. Gate (the website of the San Francisco Chronicle) on October 29, 2009 -- over 14 years after the death of Richie Heck:

Rights of first refusal reduce the value of the interest being sold. In effect, the purchaser becomes a stalking horse for the holder of the right. Normally, when a buyer wants to purchase real estate or an interest in an entity, they undertake due diligence. This can include inspections, review of the books and records and hiring professionals to investigate areas of potential concern. Moreover, buyers want to negotiate for the best price. However, the more effective job the prospective buyer does with negotiation, the less likely it will be for the prospective buyer to purchase. The holder of the right of first refusal will become more likely to exercise the right. The prospective buyer will either lose their money and time with investigation and due diligence or lose interest in the first place.

Comments: Rights of first refusal, options and other restrictive agreements that carry out a business purpose for a Family Business Enterprise should be fully respected for all valuation purposes and no increase in value should arise under any principle for an interest subject to such rights, options and restrictive covenants. The final regulations should include an example of this point.

Furthermore, the discussion applicable to these restrictions and the story of the Heck family, which is not sufficiently uncommon with the succession of family business enterprise, should alert the IRS and Treasury to the harm that will be done to family business succession. On the other hand, non-family owners do not incur the strains of familial relationships and dynamics -- if the Proposed Regulations are made effective to Family Business Enterprise. The utmost care is needed to avoid damaging the already difficult task of enabling family business to succeed to the next generation.

Under Secretary Treasury Assistant Secretary for Tax Policy Mark Mazur is quoted by CCH⁷ as stating:

Rather than undertaking a surgical approach to addressing concerns with valuation the Proposed Regulations release a broadside, sweeping up Family Business Enterprise along with entities that exist largely for tax avoidance and which hold assets to the extent not reasonably connected to a Family Business Enterprise. Thus, the Proposed Regulations: (i) introduce capricious and arbitrary requirements never before use in federal transfer taxation; (ii) eschew objective valuation in favor of a vague theory to generally accepted valuation principles (to which the regulatory precedent is two instances by example is applied to net asset value as the method used to determine the value of the entity), (iii) include extensive references to the put and minimum value, (iv) function with fundamental disrespect of agreements made by family members in Family Business Enterprise and belief they are mere tactics to drive down value; (v) disregard most state laws (unless unwaivable); (vi) leave the valuation determination to an imaginary negotiation in a universe without respect for state law or agreements and now more vulnerable to deviations from objective valuation standards; and, (vi) disregard family conflict and adverse dynamics which make family business succession particularly challenging, business owners and those who care about family business succession and its continuance.

Thus, it should not be a shock that the public, estate planning practitioners (attorneys, accountants and appraiser), political leaders and those concerned with the succession and success of Family Business Enterprise share skepticism and dread over the scope and extent of additional estate taxes, in particular, and gift and GST taxes that the Proposed Regulations will hoist upon family controlled businesses but not identical enterprise owned by outsiders.

6. What if the family business has no agreements restricting transfer and state law provides for no restrictions on transfer? Will objective principles of valuation apply under existing law if none of these conditions exist? There would then be no applicable exclusions and no disregarding restrictions. In that setting, under what valuation standard with discounts be determined as provided in existing regulations under Code §§ 2512 and 2031? Will it be under existing law with full application of Rev. Rul. 93-21 and no application of the family attribution rule? Will a deemed put and minimum value apply in any respect?

Comment: The final regulations should make clear and with example the treatment that would be given. Please, note that if the phrase "generally accepted valuation principles" is used that such reference will confuse the matter since it fails to comply the existing regulatory standard.

7. If the family dynamic reflects controversy, dispute and stress such that difficulties are reasonably expected to arise with respect to post gift/post-death management, policies and/or governance of the entity such that it is reasonably evident that the family members are not collusive, can these conditions over-ride the regulatory premise that the agreements made among the family members should be disregarded restrictions?

Comment: Allow the estate/donor to show by a preponderance of the evidence that the family dynamic as of the time of the transfer is sufficiently adverse that controversy, dispute and stress are reasonably expected to arise with respect to post gift/post-death management, policies and/or governance of the entity such that it is reasonably evident that the family members will respect the otherwise applicable restrictions and/or disregarded restrictions, as the case may be.

8. Apply the Proposed Regulations to both family and non-family business. Thus, if the Internal Revenue Service and Treasury seek additional revenue it will not be imposed in a discriminatory manner that is prejudicial to family ownership but will apply across the board. Family membership should not be prejudiced when compared to ownership by outsiders. (While the application of these Proposed Regulations to active trade or business (herein Family Business Enterprise) is wrong and unjust for the many reasons stated in these Comments, then regulations should impose this estate and gift tax hike against everyone and not just family ownership.

Comment: Do not impose the stealth estate and gift tax increase against only family ownership. Impose it against entity ownership of active business and the assets they use (i.e., the 6166 property) or none. Separate but unequal does not amount to justice.

9. The Proposed Regulations have been issued under the pretext or set of assumptions materially, substantially and massively understatement of the consequences and impact of the regulations if finalized. The substantive of this statement is supported in Section XIV of these Comments and are incorporated herein. This Commentator submits that the release, notice and assumptions under which the Proposed Regulations were issued not only violate substantive due process but reflect lack of appreciation of the impact and confusion created.

10. AH Inclusive Request: The refusal of the IRS and Treasury to withdraw the existing Proposed Regulations or issue formal clarification before the Comment period expired have frustrated the due process ability of the public and commentators to respect with greater focus on the meaning of proposals that Treasury and the IRS actually want. The IRS and Treasury did take a positive step by adding time to the Comment period from what may normally have occurred. However, that does not cure the problems with the proposals or uncertainties and dualities inherent in the proposals. As matters now stand, Comments need to be submitted with alternative applications. As a result of this lack of clarity, commentators wishing to provide constructive assistance and particularized objections have been relegated to considering "what ifs" and alternatives in rendering formal comment. Energy and focus are diffused in the fog of intention.

Treasury and the IRS would then have an open field to develop revised regulations in final form in which examples, rules and application will not have received particular scrutiny, or in which corrective action is incomplete. The necessary changes, in any form, to the Proposed Regulations are so massive as to necessitate that the initial proposal not be finalized without a later hearing on a revised set of proposed regulations, or that the project start anew or that Congress control the matter.

The potential for material damage to family business owners is heighted because the regulations disregard legitimate and common business practices. In place, the proposals create a set of capricious assumptions virtually unknown in the real world for the purpose of increasing valuation for family business ownership beyond true economic value. The essential uncertainty is the amount of that increase and the various disputes it will generate throughout the compliance process.

Furthermore, in view of the fact that the IRS/Treasury have asserted broad and new changes that extend what was a narrow Code section into the most significant change in valuation law in over fifty years, the procedural integrity to facilitate, not make more difficult, the rendering of comments should be protected.

From the standpoint of the IRS and Treasury one would expect that the regulatory authorities would want to have the regulations from inception to final form receive full public review before the comment period ends. The IRS and Treasury are aware that the legality of the proposed regulations will be challenged, in whole or part. Thus, why add another hurdle to enforcement, namely lack of sufficient due process in the review of an excruciatingly difficult set of regulations that confound even highly experienced practitioners and opportunity to address what may be in the final product? The lack of clarity in the original issuance and potential for substantial change make less likely that public airing of final regulations will have occurred. The next footnote includes an article from a Freedom of Information Act (FOIA) release respecting arrangements to establish regulations without hearing.⁸

Even without the intent to issue final regulations without an effective hearing relative to the ultimate product, the lack of clarity with the proposed regulations may have a similar effect if final regulations are issued based on the proposals published in August,

Thus, public and professional skepticism with the regulations and how they will be applied and argued in the open-ended context of disregarding state law restrictions and the provisions of the most common, reasonable, logical and prudent agreements among the owners of family controlled entities should be clearly understood. Consider for example, the statement in the preamble;

Comment: Revise the regulations so that agreements complying with Code § 2703 will be honored in all respects for purposes of Code § 2704 to the extent that the agreements satisfy the requirements of Code § 2704. To the extent that the statutory provision regarding applicable exclusions cannot be overcome, then the revision should apply to restrictive covenants.

Therefore, if a transferor dies within three years of making any transfer with respect to a general partnership interest (such as by sale, conversion of the general partnership to a limited liability company [LLC] or limited partnership), the rule under Proposed Regulation § 25.2704-1(c)(1) recaptures the absence of the minority interest discount for the value of the gross estate if the decedent dies within the three-year window. This treatment applies, regardless of whether the transferor owned a controlling interest in the general partnership or a minority interest in the general partnership. Thus, while the Proposed Regulations address transfers by controlling owners "shortly" in the context of general partnerships the elimination of the minority interest discount applies regardless of the percentage ownership owned by the transferring general partner.

Second, minority interests discounts are lost if the company wants to consider ownership by an unrelated party. Thus, the family members or company under the exception for non-family ownership to be considered must pay for the interest of the non-family member under the minimum value and put test for that interest to be respected. See, Reg. § 25.2704-3(b)(5)(v). Therefore, the IRS has eliminated minority interest discounts for at least 20% of the ownership interest in a family controlled entity if non-family ownership is to be respected.

COMMENT: Delete the requirement in total in See, Reg. § 25.2704-3(b)(5)(v).

Third, the minority interest discount may be eliminated if the either the principle of generally accepted appraisal principles applies or negotiations are assumed between known parties. The Proposed Regulations adopt an approach of family control and assume that restrictions shall be disregarded whether established by agreement or the terms of most existing state law. Thus, the valuation decision is made in a vacuum separated from reality.

Into this vacuum, the IRS inserts a new theory in which established valuation principles . . . as cited by the Appraisal Institute . . . are disregarded, and to which net asset value is the only method reflected in any example in existing regulations to determine entity value. Perhaps, other methods are allowed, but the examples do not so reflect. Thus, the minority interest discount, which may be built into some methods of valuing income (such as discounted cash flow) will be lost since discounted cash flow is not an illustrated method to value net asset value. In addition, once negotiations between particular parties are assumed, the IRS will argue for no minority interest discounts.

Thus, the comment in this section goes to a more refined point of objection. It also supports turning over to Congress the entire regulatory process in this matter. In addition, the look-back rule, if implemented should not exceed 18 months in view of the concluding reference in the prior paragraph.

Comment: The IRS and Treasury should clarify whether the loss of inspection rights on death or transfer will constitute an applicable exclusion or disqualified exclusion. If so, then it becomes further important that agreements that restrict transfer or provide rights of first refusal subject to redemption or cross purchase so that the corporation or other shareholders can protect against outside ownership without additional prejudicial estate or gift tax not incurred by non-family controlled entities.

Comment: (1) Develop regulations that are less harmful and intrusive to family business ownership. It is apparent from numerous observations in these Comments and the comments that the IRS and Treasury have received from family business owners, the appraisal industry and family business relationship consultants that the adverse impact of these regulations on Family Business Enterprise has been materially and unfairly underestimated. The standard, for example, to respect an outsider as an owner for purposes of consent is so onerous and expensive as to be virtually worthless. In the foregoing I did not include (i) the unfairness of refusing to include offsets allowed in value under objective principles of valuation, the required use of cash or equivalent with six months, or (ii) the apparent requirement to have the interest rate on the promissory note (to the extent linked to operating assets) tied to an interest rate in excess of the applicable federal rate (AFR) since that rate can create a valuation discount thus requiring a higher rate of interest. Each of the foregoing factors will make the cost of capital to respect the third party even greater than in the foregoing example in which the additional costs is $6.5 million. Thus, Treasury and the IRS should either develop criteria that are less expensive and consistent with sound business practice or refer the matter to Congress. The current criteria impose an artificial and capricious demand that goes far beyond the necessities to satisfy any legitimate concern to respect outside ownership. I suggest instead, the following alternative criteria:

The Minimum Value Redemption Terminate S Corporation Elections

The minimum value test creates a situation in which S Corporations will likely become disqualified for liquidation preferences when outsiders receive more than family owner, who by objective principles of valuation will not have their valuations artificially inflated by assumptions contrary to business practice. Treasury Reg. § 1.1361-1(l)(2)(i) provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter, articles of incorporation, bylaws, applicable state law, and binding agreements relating to distribution and liquidation proceeds (collectively, the governing provisions). If the outsider shareholder must receive more than fair market value to have the interest respected for purposes of respecting agreed upon conditions or limitations, then the distribution/liquidation creates a liquidation preference in violation of the S Corporation rules.

Comments: Establish clear rules and examples to prevent any corporation from losing S status as a result of the preferences and different liquidation and redemption rights that will apply among family and non-family owners. The recommendation that I made immediately above in this section avoids the S Corporation problem.

Even if the narrow construction of the Proposed Regulations applies (i.e., the put right and the minimum value do not apply after disregarding a condition), general partners may be forced into an effective put right valuation since the traditional fair market value pricing creates a disregarded restriction. This follows because once the Proposed Regulations disregard any put right at less than the "minimum value" (such as a fair market valuation considering all applicable premiums and discounts applicable the interest and commercially reasonable terms for payment), the put valuation created by the state law will apply. The family members are prohibited from establishing any alternative that will be respected unless non-family members hold ownership interests with put rights and minimum value satisfaction per the arbitrary standard under the regulation.

Comment: Eliminate the three-year rule, and use for non-family members the commercially reasonable test, similar to what applies under Code § 2703. Also, allow for fair market value pricing generally with respect to any disregarded restriction. Once the law eschews "commercially reasonable" and "fair market value" as fundamental tests, the standards devolve to become arbitrary, capricious and inconsistent with common business practice.

Franchising contracts commonly impose a host of restrictions, most pertaining to operations and others limiting the transfer of ownership interests by the franchisee. Yet, the restrictions are disregarded if the franchisor is not "providing capital to the entity for the entity's trade or business operations, whether in the form of debt or equity." The franchisee commonly pays a franchise fee and the franchisor provides a host of marketing support, supplies and other facilities and restrictions without acquiring capital to the entity in the form of debt or equity. Under the proposed regulations none of the reasonable restrictions will be relevant in determining the value of the franchise company or interests of the estate/donor notwithstanding the fact that they arose for commercially reasonable purposes yet are not for the limited purposes recited in the regulations.

Comment: Not only eliminate the condition to provide capital in any form from the exception to a disregarded restriction, but ask Congress to remove the requirement as an exception to applicable restrictions if the exceptions to applicable restrictions currently existing are limited in any respect with regard to Family Business Enterprise. If this cannot be done except with legislation, then all the more reason exists to refer this project to Congress and cease such substantial change in valuation law insofar as it applies to Family Business Enterprise. The disrespect of third-party commercially reasonable restrictions when valuing Family Business Enterprise is material and consequential.

Questions, Clarifications Requested and Comments:

Furthermore, at least 60% of the assets must be operating assets in an active trade or business using the test under IRC § 6166(b)(9)(B) if a promissory note is to be respected.

Furthermore, restrictions commonly exist in deeds of trust that prevent junior/subordinate financing) or which enable the holder to call the loan) and banks can impose limitations on collateral against general assets. Thus, the only security that may be available will be guarantees. Thus, the loan constitutes a disregard restriction unless adequately secured and with a value equal to cash or property equivalency even when the borrower has substantial assets. The absence of security is accepted with Code § 6166 deferrals (such as under the Roski decision and existing IRS rules implementing that case). Now, guarantors will need to provide financial statements if guarantees are used to collateralize the loan and the IRS will be able to intrude on the privacy of these third parties in the family business context.

Comments:

In this setting, the proposed regulations target Family Business Enterprise. Granted, the impact is not the result of a sniper looking down a scope at a single individual, asset class or industry. Rather, it implements carpet or cluster bombing in which distinctions are not made, yet awareness of the population of victims was known before the figurative bomb was dropped. Yet, aware that the proposals relative to legitimate family enterprise would cause major objections, the regulations proceeded nevertheless with the owners of Family Business Enterprise being made to pay more estate tax and gift tax than will fall upon outside owners and to drive up the cost of capital for family business succession.

Comment: The terms "active" or "passive" can be confused because of different meaning under income tax law as opposed to estate tax, particularly in the area of defining business activities worthy of special consideration and the assets associated with them. Income tax tests for "active" or "passive" are too narrow in the estate and gift tax contexts. The Code § 6166 property test provides a workable solution; and the regulators show satisfaction with that test in the promissory note context.

Moreover, the exclusion of Family Business Enterprise from the reach of the proposals will enable the IRS and Treasury to focus their objections to "tactics" to the entities that lack legitimate business active purpose as that term is used in the 6166 context. The IRS and Treasury should not opt for simplicity when fundamental justice in the regulatory context compels not imposing higher taxes against family business ownership than applies with ownership against non-family business . . . especially with Family Business Enterprise.

In the real world, Georgia Frontiere was a singer and dancer who had been married five times when she met Rams owner Carroll Rosenbloom. She inherited the Los Angeles Rams of the National Football League ("NFL") in 1979, when Mr. Rosenbloom died while swimming. Upon taking over the team following her husband's death, the widow soon fired her step-son, Steve Rosenbloom, the Rams' operations manager, who had been groomed since childhood, by his father, to run the team. Georgia twice relocated the team (from Los Angeles to Anaheim, then to St. Louis), and died in 2008. The feeling of the abandoned step-child has also shared by many football fans in and around Los Angeles, which lost its long-established National Football League team. Mr. Rosenboom's failure was to have an estate plan and restrictive agreements in place to protect his son.

Ralph Dale Earnhardt, Jr. rode the #8 stock car to fame and fortune in the tradition of his father, Ralph Dale Earnhardt, who died in 2001. Jr. started racing while a teenager, following a three-generation family tradition with NASCAR. In May 2007, Jr. left Dale Earnhardt, Inc. ("DEI"), the company started by his father, to begin racing for another team, Heindrick Motor Sports. He was forced to change his racing number to #88. He gave up his Dad's beloved number 8 and ceased racing for the family business, which holds the licensing rights to the holy #8. Sports Illustrated reports that Dale, Sr., had hoped his son would take control over day-to-day operations of DEI.²² However, Senior's estate planning paperwork did not ultimately implement this goal. Reportedly, the fracture arose in a power struggle with Jr's long-time step-mother, Theresa Earnhardt. She disputed Jr. over right to control, or eventually control the corporation (in which Jr. reportedly had no ownership); and, she forbade the son continued use of the #8, to which DEI held the licensing rights.²³

Between 1066 and 1688 (excluding the Commonwealth of 1653-1659), 28 kings and queens ruled England. Six among that number were murdered during their reign or deposed and then murdered²⁴ and two were deposed but not murdered.²⁵ That accounts for 25% of the monarchs during this span of 622 years. In addition, two other kings were killed in battle.²⁶ Later, George IV ruled as Regent (a royal term for conservator) for his mentally ill father, George III,²⁷ and Edward VII abdicated due to his unacceptable choice of a divorcee as his wife. Moreover, a list of wives, nephews, cousins, sisters, brothers, collateral family, advisors and friends too numerous to mention were judicially slaughtered in these succession conflicts.

The battle over succession is not unique to the English, or to the business of governance of nations. The differences between royalty and the general population may have more to do with temptation than anything else. When there is a lot to gain . . . or in a family if there are old scores to settle . . . battles over inheritance and control become the grist for litigation and disputes. Moreover, the estate tax falls upon the wealthy -- most tempted class and ablest to finance litigation and find attorneys more than happy to accept the case. It is to these owners that business agreements and laws that restrict transfer, define or limit voting rights and secure succession in the manner desired have the greatest nontax significance. Thus, battles over the control of the manufacturing company, hotel chain, auto dealership, sports franchise, farm, winery or any other form of family commercial endeavor are real and expensive. The buy-sell and restrictive agreements are reviewed and applied with a fine tooth comb. The observation of the Under Secretary that such agreements are "tactics" fails to respect the reality and non-tax importance of these agreements.

A simple Google search of family business succession will reveal instantly the importance of buy-sell and other restrictive agreements for the continuation of the closely-held business. The best agreements function with awareness of the business needs, cash flow capabilities, leadership succession, importance for restrictions, control and tax consequences. A paper published by the American Bar Association Section of Taxation/Real Property, Trust and Estate Law entitled "Next Generation Disputes in Family Business: Navigating the Remedial, Ethical and Tax Quandaries-A Case Study" (October 22, 2011) reflects the intense multi-faceted significance from tax and non-tax perspectives of buy-sell and other restrictive agreements.²⁸

The following quotation is from the book liner advertisement for the book Family Enterprise: How to Build Growth, Family Control and Family Harmony, by Richard L. Narva, published by Global Law and Business (2015):

The proposed regulations tamper with this delicate balance and disrespect as unsavory the fundamental protections that all businesses, family and non-family, need for survival.

Among the estate planning community, the assertion by the IRS and Treasury that restrictions with family business transfers are other than legitimate defies credulity. This Commentator is not seeking protection for what the regulators seek with respect to entities that are not within the scope of Family Business Enterprise. The IRS has been successful under Code § 2036 with shutting down the worst offenders in the investment entity realm. Even with that success, this Commentator understands that the regulators wish further protection against abuse and consider restrictions contrary to the proposals to be tactics. While that is not necessarily the case in the real world, the offense to actual experience and legitimate enterprise is substantial and actual when the same erroneous assumptions are applied to Family Business Enterprise.

The proposed regulations substantially re-implement the long discredited family attribution rule.³⁰

Comments: Before revising the draft regulations, the IRS and Treasury should conduct a special conference at which the non-tax significance of buy-sell and other restrictive agreements are reviewed together with the significant of family dynamics as a fundamental problem for business succession. There are excellent organizations dedicated to family business succession and entrepreneurship that may be of assistance. If this is not done, then exclude Family Business Enterprise from the proposed regulations or refer the matter to Congress for consideration.

Further Comment: Provide that for consideration of conflicts in family dynamics when the dynamics are adverse or otherwise indicative that the restrictions will be respected. Please, note that is comment is made because the proposed regulations not only apply family attribution but preclude the consideration of adverse dynamics then they exist. The compliance cost for such an exception outweighs the injustice of disregarding reality.

As a further recommendation, I suggest that Treasury and the IRS hold a separate hearing to take testimony from business owners and the professionals regarding the difficulties of family business succession. At the same time, Treasury and the IRS can present studies of the impact and evidence of the offending "tactics" and include differentiation between passive holdings and active trade or business and the assets therein used. In that way, the public and taxing authorities may achieve a better understanding and the extent to which the proposals are based on general dislike for objective principles of valuation and Rev. Rul. 93-21, on the one hand, or true concern with phony restrictions that are not implemented for real, on the other hand can be determined. For that matter the IRS and Treasury could develop a closing agreement form in which the interested parties agree to respect the conditions and limitations for a period of time. This is done with partnerships, for example, with anti-churning and can provide a workable framework with reflection and understanding of the legitimate concerns of business owners.

Seventy percent of family-owned businesses liquidate on the death or incapacity of the principal owner.³¹ Ironically, the estate and gift tax function of the IRS may never see the results when the business blows up or is liquidated years later. The vulnerability of succession is often a post-death event that may not even be able to be properly measured by a loss of key person discount or other fact that is known, knowable or reasonably foreseeable as of the valuation date (date of death or alternate valuation date).

Business succession planning poses a unique and significant challenge for the business owner and the estate planning professional. Most closely held businesses will fail on the incapacity or death of the principal owner. The result causes loss of value for the family . . . lack of security for the business owner who may not want the dates of death and retirement to be co-extensive . . . and loss of a valued client for the estate planning professional.

Communication among family members and the key employees often spells the difference between whether or not a family business will be able to continue after the death or incapacity of the principle owner. MassMutual conducts a regular study regarding family business, which is available on-line.³² The instruction letter to the study published in March, 2010 states:

Closely held business ownership does not necessarily indicate a family business, although many are of that character. Among strangers, the challenges to develop a succession plan can be extensive. Will leadership be developed? Is the organization run by personality and creativity of one person, or has synergism been developed to carry on successfully? How will the buy-out be paid? Are the senior owners able and willing to look at the issue of their own mortality? With family businesses, the issues become even more intense. Are family members respected or merely tolerated? Is compensation based on merit? Are family members not in the business loved on a par with those family members who are in the business? How will the estate wealth be divided among family members when not all children are in the business yet most of the wealth is tied up in the business?

Dan Baker Consulting, Inc. and the Founding Director of the Life Enhancement Center at Canyon Ranch, shared an observation that this Commentator has never forgotten:

Successful businesses will address the planning needs and dynamics. They will move from entrepreneurship, dependent upon the personality of the individual, to a professional structure. The future of the organization will evolve toward greater reliance on shared values and the abilities of the business and its management. Long-range planning will likely become the culture, not the exception. Successful estate planning professionals will encourage their clients to pursue succession planning and bring together a team to help secure a successful plan and happy clients. (Of course, the business owner may be fortunate to locate an outside buyer during life, or one who will agree to acquire the business upon the owner's death. Most business owners, however, die before a third-party sale is arranged in those businesses in which the owner wants to remain active in the business until death.)

The following are common goals to a business succession plan:

• Establish successor ownership to successfully continue the business after the principal owner is no longer active in the business.

• Preserve the going concern value of the business.

• Secure the retirement of the principal owner.

• Coordinate the succession of the business within the estate plan of the principal owner.

• Minimize or eliminate estate and income taxes consistent with good business judgment and overall planning desires.

Before stating my comment, I conclude with this true life event (dollar amounts updated to current times) related to me by a banker with whom I was working in connection with a conference on family business succession.

The foregoing four requirements do not require that the third party shareholder/owner provide financing. However, Prop. Reg. § 25.2704-2(b)(4)(i) (applicable restrictions) and 25.2704-3(b)(5)(ii) (disregarded restrictions) provide an exception imposed by an unrelated person on liquidation to be respected only if commercially reasonable and imposed by an unrelated person providing capital. Thus, in the narrower context of third party restrictions on liquidation is capital required if the third party is also a shareholder or owner imposing the condition?

Comment: Point of clarification request only.

Absolute consistency of income tax basis with the federal estate tax value is not mandated in all instances. Under traditional consistency law, the beneficiary who did not participate in the estate tax filing could assert a different value for which that beneficiary had to satisfy a strong burden of proof. Reg. § 1.1014-3. In addition, under traditional and recently enacted consistency rules, an estate tax return was required to be filed for basis consistency to apply between the estate tax value and the income tax basis. Code § 1014(f) and Rev. Rul. 66-56. Most important, the current income tax basis rules under Code § 1014(f) do not apply to estates that are not required to file an estate tax return or to assets in the gross estate (regardless of the value of the gross estate) that qualify fully for the estate tax marital deduction.

Placing family business owners and the fiduciaries that administer trusts and estate that hold family-controlled business interests to the burden of paying for two separate appraisals is excessive and unfair. These burdens will not be encountered by non-family outside ownership.

Comment: If the higher valuation scheme becomes finalized then the estates, trusts and beneficiaries to whom the scheme applies should be allowed to use the same valuation for income tax basis purposes regardless of the value of the estate or classification of the bequest as marital deduction qualifying; and, reporting under Form 8971 and Schedule A thereto should allow for the estate tax value to be used for each of these purposes.

To introduce this point, I reference the article by Dennis Belcher, Esq., and William Sanderson, Esq., Estate Planning for the Closely-Held Business for a tax conference at the College of William and Mary³⁵ in 2010 and the statistics published by the IRS. The article by Mr. Belcher and Mr. Sanderson is consistent with my expectation and the statistical information published by the IRS. The article commences with the following statements:

The following deficiencies, inaccuracies and misleading statements appear in the notice and summary to the Proposed Regulations.

House Report No 964, 101^st Congress Second Session 1137 (1990). The Conference Committee Report states:

The notice to proposed regulations cites the decision in Estate of Murphy 60 T.C.M. 645 (1990), in which a death-bed gift of control was disregarded. The notice does not cite Estate of Frank v. Comr., 69 T.C.M. 255 (1995) wherein no gifted interest that increased discounts shortly before death was brought back into the gross estate. In Frank the decedent owned 50.3% of a closely held corporation. Two days before the decedent's death, the decedent's son (acting under a pre-existing power of attorney) caused about 18.2% of the corporation's stock to be transferred from the decedent to the decedent's wife. After the transfer the decedent and his wife each owned approximately 32% of the stock. The decedent died two days after this transfer and his wife died 15 days thereafter. If the IRS believes that recitation to case law is important, then all relevant cases should be considered, including those that are contrary to the interests of the regulatory authorities.

Accordingly, the preamble ignores the decision with a fewer number of days between transfer and death and then runs the 30-day prior-to-death-transfer into a statutory period 36 times longer (three years). The conclusion is arbitrary, not supported by law and contrary to the provisions of Code § 2035.

Code § 2704(b)(4) authorizes the Treasury to adopt other regulations though with a major limitation that the IRS and Treasury ignore . . . either directly or by creating a fiction. This section states:

Thus, the IRS asserts a standard of outside ownership that will be respected that is so expensive and strewn with contrived conditions (insertion of a put right at minimum value, disregard of deductions in the computation of minimum value that are fully allowed under the regulations under Code §§ 2031 and 2512), requirement for the use of a secured promissory note (regardless of the practical problems that may create), eschewing applicable federal rates in favor of a market rate, and not allowing any promissory note unless associated with an active trade or business with at least 60% operating assets (which is itself is not the most troubling of the elements) and, then to require a minimum 20% outside ownership so as to make the cost of capital to include a restriction approved by a non-family member to be economically unworkable (and thus capricious). Then, as an ancillary kicker, the use of different valuations for the redemption of family versus non-family ownership will terminate S elections. Thus, the IRS and Treasury have created this hurdle so expensive and trouble-strewn -- all for the apparent purpose of skirting the limitation that the condition does not ultimately reduce the value of the interest. However, this effort falls short of commercial good faith and fair dealing toward the owners of Family Business Enterprise.

The application of the limitations for deductions to those allowed for claims under Code § 2053 illustrates compounds one legal wrong upon another. The regulatory change under Code § 2053 imposes a regime for allowance of deductions that is contrary to the law as pronounced by a majority of the courts of appeal, to which there was no legislative change in decades to create a limitation on deductions unsupported by the weight of authority. Jacobs v. Comr., 34 F. 2d 233 (8th Cir. 1929), cert, denied, 280 U.S. 603 (1929), aff'g 9 B.T.A. 636 (B.T.A. 1927); Estate of Kyle v. Comr., 94 T.C. 829 (1990); Estate of Sachs v. Comr., 856 F. 2d 1158 (8th Cir. 1988); Estate of Nesselrodt v. Comr., T.C. Memo 1986-286; Comr. v. Shivley's Estate, 276 F. 2d 372 (2nd Cir. 1960); Estate of Hagmann v. Comr., 60 T.C. 465 (1973), aff'd per curiam, 492 F.2d 796 (5th Cir.); Comr. v. State Street Trust Co., 128 F. 2d 618 (1st 1942); Estate of McMorris v. Comr., 243 F.3d 1254 (10th Cir. 2001), rev'g T.C. Memo 1999-82; Wilder v. Comr., 581 F. Supp. 86 (N.D OH 1983); Estate of O'Neal v. U.S., 258 F.3d 1265 (11 Cir. 2001); and, Estate of Smith v. Comr., 198 F. 3rd 515 (5th Cir. 1999), among others. The legality of the 2009 regulations under Code § 2053 have not been the subject of a court decision to which this Commentator is aware.

The proposed regulations violate judicial standards for the enforcement of regulations. See, Mayo Foundation for Medical Education and Research, et al. v. United States, 131 S. Ct. 704, 2011. Mayo Foundation reversed the Eighth Circuit's overruling of Treasury Regulations pertaining to the application of the Federal Insurance Contributions Act (FICA) to medical students. In the process, Mayo Foundation followed Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) by applying the Chevron standard, and narrowed, if not wholly eliminated, the distinction between interpretive and administrative regulations when applying the Chevron standard. Mayo Foundation frames the issue and analysis (on the issue of the application of FICA to medical students) as follows:

• The first step of the two-part framework is to ask whether Congress has "directly addressed the precise question at issue." Reply: Yes, the statement in the Congressional Record (House Report No 964,101^st Congress Second Session 1137 (1990)) recites that the purpose of the regulations is not to affect discounts for minority interest or lack of marketability. The Proposed Regulations create new and artificial standards, eliminate the minority interest discount (at a minimum for outside ownership respect, various instances under the three-year rule and potentially under the new theory of "generally accepted valuation principles") and generally reduce minority interest discounts and lack of marketability discounts ,in particular. Moreover, Code § 2704(b)(4) includes the restriction, "but does not ultimately reduce the value of such interest to the transferee." The IRS and Treasury cannot circumvent this requirement by mere assertion that state law and bona fide agreements reduce value for tax purposes but not for real world purposes. If the regulatory authorities have evidence of this, it should be presented before Congress and under sworn testimony that can be cross examined. Otherwise, the limitation in the Code has no meaning. In fact, the creation of a standard that is virtually impossible to satisfy to qualify to respect non-family ownership is so extreme as to amount to no more than window dressing. The Fourth and Fifth Circuits rejected the application of the exception to the Treasury's regulation-promulgated definition of "an omission of income" for the purpose of applying the six-year, rather than the three-year, statute of limitations. Home Concrete & Supply, Inc., et al. v. U.S., 634 F.3d 249 (4th Cir. 2011), rev'g and rem'g 2009 U.S. Dist. LEXIS 127250 (E.D.N.C. 2009). The circuit courts rejected granting these regulations Chevron -deference because Code § 6501(e)(1)(A) was not ambiguous. This Commentator submits that the Congressional record and statute reflect that the Treasury appears to have exceeding its authority with the pending regulations, in whole or part.

• In the event that ambiguity is determined, the court will not disturb an agency rule unless it is "arbitrary or capricious in substance, or manifestly contrary to the statute." In this regard, the Supreme Court follows Chevron, supra, stating: "The sole question for the Court at step two under the Chevron analysis is 'whether the agency's answer is based on a permissible construction of the statute.'" Reply: The imposition of the family attribution rule, the extension of a 30-day decision (Murphy) into a three year rule, the use of the novel theory of generally acceptable appraisal principles rather than objective valuation under the existing valuation regulations, the disregard of bona fide third party agreements with disregarded restrictions unless related to providing capital and the various elements of minimum value reflect an arbitrary and capricious interpretation of the law. Finfrock v. U.S., 2012-1 U.S.T.C. ¶ 60,641 (C.D. Ill.).

Of course, this Commentator submits that such change can only be made by legislation. In any event, it should not be imposed in a discriminatory manner. Thus, eliminate the bias against family business ownership if Family Business Enterprise will bear additional transfer tax.

Very truly yours,

² Reg. § 25.2511-1(e) states "If a donor transfers by gift less than his entire interest in property, the gift tax is applicable to the interest transferred. The tax is applicable, for example, to the transfer of an undivided half interest in property, or to the transfer of a life estate when the grantor retains the remainder interest, or vice versa. However, if the donor's retained interest is not susceptible of measurement on the basis of generally accepted valuation principles, the gift tax is applicable to the entire value of the property subject to the gift. Thus if a donor, aged 65 years, transfers a life estate in property to A, aged 25 years, with remainder to A's issue, or in default of issue, with reversion to the donor, the gift tax will normally be applicable to the entire value of the property."

³ This Commentator believes that the issues raised in the Proposed Regulations insofar as they may apply to Family Business Enterprise should be addressed by Congress and not by these regulations. The consequences are too significant even if the put and minimum value do not apply once restrictions are disregarded.

⁴ Calif. Corp. Code § 1601(a) and (b) provide: "(a) The accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation, shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder . . .

(b) Such inspection by a shareholder . . . includes the right to copy and make extracts. The right of the shareholders to inspect the corporate records may not be limited by the articles or bylaws."

⁵ In fact, unless BF provides capital to the bottling company, the first right of refusal would constitute a disregarded restriction and applicable restriction.

⁶Propstra v. U.S., 680 F.2d 1248 (9th Cir. 1982); Estate of Bright v. U.S., 658 F.2d 999 (5th Cir. 1981); Minahan v. Comr., 88 T.C. 492 (1987) -- IRS sanctioned.

⁷ CCH Tax Daily (8/30/16): Senate Republicans Ask Lew to Withdrawal Code Sec. 2704 Proposed Regulations: http://news.cchgroup.com/2016/09/30/senate-republicans-ask-lew-to-withdrawal-code-sec-2704-proposed-regulations/

⁸ FOIA RELEASE REVEALS 1983 TREASURY-OMB RULEMAKING PACT.

Published by Tax Analysts(R)

As a result of a Freedom of Information Act request, Treasury has released a decades-old and long-sought-after memorandum between itself and the Office of Management and Budget that purports to exempt many IRS regulations from regulatory review procedures.

The 1983 memorandum of agreement, criticized by a leading congressional taxwriter recently in the context of the proposed section 385 debt-equity regulations, waives review procedures of Executive Order (EO) 12291 to all IRS regs except legislative regs that are designated as major, thereby exempting many regs from more detailed analysis and review. The agreement also exempts from OMB review revenue rulings, revenue procedures, customs decisions, legal determinations, and "other similar ruling documents." Treasury is still responsible for alerting the OMB on major regs on which the review has been waived and non-major regs "that reasonably could be expected to have a significant economic impact." The memo also states that the OMB reserves the right to review the economic impact of any regulation.

Treasury released the memo on its FOIA page, which was last updated September 20, but did not mention the source of the FOIA request. In an April letter to Treasury Secretary Jacob Lew, Senate Finance Committee Chair Orrin G. Hatch, R-Utah, requested that the memo be made public, saying it "further cloaks the regulatory process in secrecy and decreases regulatory transparency at a time when the Executive Branch is attempting to achieve a great deal of policy through regulatory measures generally and tax regulations specifically." Hatch challenged the notion that tax guidance doesn't have a significant effect on the economy, citing the administration's release of the proposed debt-equity regs (REG-108060-15) after it "fail[ed] to convince Congress to legislate."

Major rules are defined as those that result in an annual economic effect of at least $100 million; a major increase in costs or prices for consumers, individual industries, government agencies, or geographic regions; or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based enterprises to compete with foreign-based enterprises. Major rules require a regulatory impact analysis containing a description of benefits and costs, a determination of net benefits, and a description of alternative approaches that could achieve the same goals at lower costs.

EO 12291 was the predecessor to EO 12866, the latter having swapped the term "major" for "significant regulatory action." Under EO 12866, the OMB is the coordinated reviewer of agency rulemaking to "ensure that regulations are consistent with applicable law, the President's priorities, and the principles" outlined in the order. The OMB Office of Information and Regulatory Affairs (OIRA) is assigned general review of agencies' regulatory actions to guarantee that they don't conflict with each other. Regulatory action is defined in the executive order as "substantive action by an agency" that encompasses any generally applicable agency statement intended "to have the force and effect of law," including all types of regulations, whether temporary, proposed, or final. Also, under the Congressional Review Act (CRA), OIRA has the responsibility for determining when rules are major. To give Congress a chance for review, rules designated as major under the CRA have a delayed effective date of the later of 60 days upon submission to Congress or after publication in the Federal Register.

Accompanying the 1983 memo in the FOIA release are 1993 letters between Treasury and OIRA demonstrating an understanding that EO 12866 does not apply to regulatory actions by Treasury that had previously been exempt from review under EO 12291. Both the letters and the memo are short on analysis as to why such IRS regs should not be subject to the additional review.

Document: (Doc 2016-19136 )

Electronic Citation: See 2016 TNT 185-1

⁹ From my own experience, the IRS has asserted a zero minority interest discount with a general partnership interest, in particular in Estate of Hansen v. Comr., Docket number 016607-04, in which case the IRS used one of its most commonly selected appraisers.

¹⁰ See, Revised Uniform General Partnership Act (RUPA) Section 701, including California Corp. Code Section 16701(b). Per the experience of this commentator, IRS estate tax attorneys will certainly argue for its elimination under state law. To be specific, Section 701 of RUPA provides a default purchase and sales price if the partnership agreement does not otherwise fix the price, See, Rappaport v. Gelfand, (2011) 197 Cal. App. 4th 1213. As Rappaport states, the liquidation value equals the separate assets of the entity discounted to present value. The decision does not discuss a minority interest discount or any discount other than present value. Similarly, the Official Comments to RUPA Section 701 (paragraph 1), recites that the rights under Article 7 of RUPA, "can, of course, be varied in the partnership agreement, See, Section 103."

¹¹ See, California Corporations Code Sections 17706.02(f)(1) (which provides that the death of an individual member is an event of dissociation) and, Section 17703.03(a) (which provides that the person's right to vote or participate as a member in the management and conduct of the LLC's activities terminates on dissociation). Thus, unless the Operating Agreement otherwise provides, the dissociated member's interest becomes an economic-only interest with no participation rights and no right to a redemption of his or her interest. See, California Corporations Code Sections 17704.04(b) and 17705.02(a)(3). On dissociation, the member becomes a "transferee" under California Corporations Code Section 17706.03(a)(3) -- an economic only interest.

¹² California Corporations Code Section 1800 establishes standing to file a complaint for involuntary dissolution of most corporations. In relevant part it states:

¹⁴ See, § XIV infra.

¹⁵ The Poldark television series featured on Masterpiece Theater on PBS provides an excellent example of what happens once a competitor gets a seat on the board and how the interests of the company can be literally undermined . . . since the company was a mining concern. See the episode that aired on Sunday, October 16, 2016 for an example on point.

¹⁶ Reg. § 20.2031-4.; Estate of Hoffman v. Comr., T.C. Memo 2001-109; Frazee v. Comr., 98 T.C. 554 (1992).

¹⁷Bardahl Manufacturing Corp. v. Comr., T.C. Memo 1965-200 and Bardahl International Corp. v. Comr., T.C. Memo 1966-182. As noted in the BNA Folio 796-3^rd -- Accumulated Earnings Tax, "The approach taken by the court in Bardahl Manufacturing was to use a mathematical formula for determining the reasonably anticipated costs of operating a business for one operating cycle. The operating cycle of a business is the time needed to convert cash into raw materials, raw materials into

¹⁸ The use of Bardahl with the QFOBI deduction may have caused some concern because the Bardahl formula requires analysis and the QFOBI benefit was both minor in amount on temporary. The consequences, however, in the present instance of not applying property text are far more drastic, harmful and significant than any consideration arising in the QFOBI context.

¹⁹ See Rev. Rul. 59-60 and Bader v. United States, 172 F. Supp. 833 (S.D. 111. 1959), which involved the valuation of a grain, feed, and elevator business in which working capital was among the elements given greater weight in the assessment of book value.

²⁰ The content of this Section VIII is drawn in substantial part from published materials by Keith Schiller under Estate Planning at the Movies and prior published content. Estate Planning at the Movies® is the registered trademark of Keith Schiller and all articles published under that name and the book Art of the Estate Tax Return are the copyright of Keith Schiller. All rights reserved.

²¹ Ibid.

²²Sports Illustrated, Time, Inc. Feb. 18, 2008, p. 74.

²³ Terry Blount, ESPN. August 18, 2007.

²⁴ William II of the House of Normandy was murdered in 1100; Edward II was murdered in 1327; Richard II was deposed and then murdered; Edward V (probably murdered in 1484), Jane was beheaded in 1553; and Charles I was beheaded in 1649.

²⁵ Henry VI (1461) and James II (1688).

²⁶ Richard I (the Lionhearted) in 1199 and Richard III in 1485.

²⁷ Regency from 1811 to 1820. George III was king during the American Revolution.

²⁸ Article by Morton A. Harris, Esq. www.americanbar.org/.../taxiq-fall11-harris-buysell.pdf

²⁹ In view of the proximity of the Tuscan experience to Venice and the context and impact of the proposed regulations, the reference to the statement in Merchant of Venice is apt.

³⁰Propstra v. U.S., supra; Estate of Bright, supra; Minahan, supra (IRS sanctioned); and Rev. Rul. 93-21.

³¹ George Stalk, Jr. and Henry Foley, Avoid the Traps That Can Destroy Family Businesses, Harvard Family Business Review, January-February, 2012. https://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses

³²https://www.massmutual.com/mmfg/pdf/FamilyPreneurship_Study.pdf.

³³ Family Firm Institute, reference www.ffi.org. See, fbc. St Aalban's Herts, UK; 1999 Survey of Canadian Family-Owned Businesses, conducted by the Touche Centre for Tax Education and Research at the University of Waterloo; and the Arthur Andersen/Mass Mutual American Family Business Survey, 1997.

³⁴ Massachusetts Mutual Life Insurance Company ("Mass Mutual") Business Owner Perspectives Survey 2011.

³⁵ Belcher, Dennis I. and Sanderson, William I., "Estate Planning for the Closely Held Business" (2010). William & Mary Annual Tax Conference. Paper 4. http://scholarship.law.wm.edU/tax/4

³⁶ The first footnote in the article appears here and is: J.H. Astrachan and M.C. Shanker, "Family Businesses' Contribution to the U.S. Economy: A Closer Look," Family Business Review, September 2003.

³⁷ The second footnote appears here and is: Anderson, Ronald C, Mansi, Sattar A. and Reeb, David M., "Founding Family Ownership and the Agency Cost of Debt" (hereinafter "Anderson, Mansi, Reeb Study"). Available as SSRN: http://ssrn.com/abstract-303864. The study defined a "deep family connection to be the family responsible for starting the company was still heavily invested in the company, and has, on average, 18 percent of company equity.

³⁸ The third footnote appears here and is Anderson, Mansi, Reeb Study.

³⁹ The fourth footnote appears here and is: Raymond Institute/MassMutual, American Family Business Survey, 2003.

⁴⁰ Ibid.

⁴¹ The sixth footnote in the article appears here and is: SOI Tax Stats -- Estate Tax Statistics Filing Year 2008 can be found at http://www.irs.gov/taxstats/indtaxstats/article/0‚id=210646,00.html and http://www.irs.gov/pub/irs-soi/08es01fy.xls.

⁴² If all estates are considered, closely-held business stock amounts to just under $15.4B in valuation, excluding estates with a value under $5 million.

⁴³ The following text of the Regulatory Flexibility Act of 1980, as amended, is taken from Title 5 of the United States Code, sections 601-612. The Regulatory Flexibility Act was originally passed in 1980 (P.L. 96-354). The act was amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (P.L. 104-121), the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), and the Small Business Jobs Act of 2010 (P.L. 111-240).